What’s it: Customer value refers to how worth a product is to a customer. It represents the difference between the perceived benefits and the costs incurred to obtain the benefits of a product.
Perceived value depends on customer perception as some benefits or costs cannot be quantified. In addition, when making purchasing decisions, consumers also depend on the relative value (benefits and costs) of a product to alternative products. Therefore, they will choose the most valuable.
Businesses need value creation for customers to be successful. Success is not only judged by how big their sales figures or profit figures are. But, we also have to look at how much value is created by companies to their customers. It becomes a reason for customers to continue to buy products, loyal, and reluctant to switch to competitors’ products.
In simple terms, businesses can generate and maximize customer value by trying to offer customers perceived benefits. But, at the same time, they must ensure, consumers spend a little sacrifice to buy their products.
When buying, rational customers compare the benefits they get with the sacrifices (costs) they have to pay. Both affect customer satisfaction. When the benefits outweigh the costs, the customer is satisfied. Conversely, lower benefits than costs result in dissatisfaction.
What is the relationship between a unique selling proposition and customer value?
Now, say you are operating a company. A unique selling proposition is your company’s way of creating value for your customers. It’s not just about benefiting them. But, it also acts to differentiate your product from the competition.
It explains why your product is superior to competitors’ products. If your product is more successful – for example, reflected in sales volume, it means you are delivering higher perceived value than your competitors’ products are. In other words, you maximize the difference between your customers’ benefits and costs.
Why is customer value important?
Satisfaction. The main reason customer value is important is because it affects customer satisfaction. A rational customer will compare the benefits and costs. They buy a product if the benefits outweigh the costs, giving them satisfaction.
Market position. By creating superior value, your company can encourage your customers to be loyal. It is also the reason competitors’ customers switch to your product. It all ultimately contributes to increasing your market share.
But, customer value also depends on the available alternatives. Customers have several product choices. When they buy, they will compare these products. If your product provides better value, they will, of course, choose your product.
Secure money. Because competition in the marketplace is dynamic, the relative value you provide can also vary, even as you maintain your current edge. For example, competitors innovate to improve their products. In the end, customers choose them because they are considered to provide a better offer.
For this reason, maintaining superior value is the key to winning the competition with competitors. If you are successful in doing so, consumers will continue to buy your product. And, that means, the money keeps flowing to you.
How to measure customer value?
Customer value is a function of benefits with costs. So, conceptually, the calculation is easy. You just need to reduce the benefits with the costs. But, we need to underline, it’s from a consumer perspective, not a business perspective.
Customer value = Benefit – Cost
The formula above shows us the value will be higher if the company can offer consumers higher benefits, lower costs, or ideally, a combination of both.
At the same cost, a product can produce higher value if it provides greater benefits. Or, with the same benefits, the customer will choose a product if the costs involved are less than the other products.
Although the above formula seems easy to calculate, there is some complexity to getting the numbers out. Benefits and costs are not always numeric numbers. However, they are also often abstract.
What are examples of creating customer value?
Several ways to deliver superior customer value. Basically, it just needs to increase the difference between benefits and costs and can be done through price, product features, and convenience.
Attributes attached to the product
Benefits can come from the quality, design, features, and other product attributes. We can more easily quantify them.
Take, for example, a t-shirt. We can use the quality of the fabric and design to describe the benefits obtained by the customer.
Another example is smartphones. Benefits can come from greater storage capacity. Or, it’s from a larger camera resolution.
Benefits also come from the company’s image, brand, and company values. They are more difficult for us to quantify. Each customer usually provides a different perspective.
Some people don’t just look at product attributes. They also look at the brand. For example, they may see several t-shirts of the same design and quality. But, since it didn’t come from a famous fashion house, they didn’t buy it.
In other cases, consumers only buy products from certain companies because they have similar values. For example, they only buy environmentally friendly products, which are by their principles and values.
Price is the most common measure to describe the costs associated with obtaining benefits. It represents the monetary cost of getting the product.
Thus, companies can create customer value by offering lower prices. It reduces the dollars spent by customers on product benefits.
But, in specific cases, the price can also represent benefits. For example, when the price of goods rises, consumers are more and more interested in them. In economics, we call them Veblen goods.
For example, some people are happy with luxury goods because it gives them high satisfaction. The higher the price, the more valuable, and the more satisfied they are.
Customers do not only see the basic functions of the product. However, they are also concerned with how the product can enhance their image and prestige. And, higher prices provide such benefits.
Time, effort, and energy
Minimizing costs doesn’t just focus on the dollars paid by customers to buy the product (price). I mean, it’s not just by selling the product at a lower price than the competition.
Indeed price is vital, but customers also consider other aspects before deciding to buy. What the customer spends is not just the price. But, it can also involve time, effort, and energy spent getting the product.
Take, for example, laptop products. First, customers spend some time comparing products, whether related to price, specifications, quality, or brand. Then, having decided, they probably finished fueling their way to the shop. Then, once purchased, they may also have to learn to use it and spend some time installing some software programs. Those are all costs.
The inconvenience can represent costs. For example, customers may not be happy if they have to buy a product with hard cash. It ultimately affects their perception of the product.
On the other hand, providing cashless transaction services can bring convenience. It becomes a way to satisfy customers and provide value to them. In this case, convenience can represent benefits.
- How to Deliver Customer Value?
- Creating Value – Why Does It Matter?
- 6 Benefits of Creating Value for Customers
- How Do Companies Create Value Along the Value Chain?
- Value Creation: Definition, Shareholder Value, Customer Value